On 22 October 2008, Rueters reported that one in six homeowners in the US have homes whose current market value is less than the amount of the mortgage loan. This conundrum is reminscent of New England in the late eighties and early nineties. In those days, people bought property that, because of economic problems and an overheated market, caused the property values to plummet leaving the property owners with large expensive mortgages with properties values less than the mortgage amount.
What should a homeowner do in this current and similar situation?
One solution is to sell the house at the depressed price and get out of the mortgage. The pronlem with this solution is the seller gets less than the loan amount and has tp pay the difference out of his/her own pocket, taking a loss.
Another solution is to rent the house or property and move to a cheaper place. Hopefully, the renter can be charged the full amount of the monthly mortgage amount. The beauty of this sloution is the mortgage will be paid off and the owner can keep the property.
A third solution is to file bankruptcy and hope the bank/mortgage holder will cooperate with the owner. Or another possible solution is to talk to the bank and renegotiate the loan at a better rate of interest so the monthly payment is lower.
The final solution is to do nothing. As long as the owner can afford to pay the monthly premium, the ownership is not in jeopardy. Do not panic.
Take, for example, the stock market. An investor buys a bunch of stock for $1,000. The market takes a diver off a cliff and now the stock is worth $700. The investor has a paper loss of $300. The loss is on paper only. The loss is only realized if the investor sells the stock when the stock price is lower.
The same holds true for the homeowner. The house, now, may have a market value of $180,000 and the mortgage is $200,000. The loss of $20,000 is realized if the homrowner sells at market price. Otherwise, there is no real loss. Holding on and paying the monthly mortgage will not jeopardize your financial equilibrium.
Remember, inflation and the housing market will recover over time. The focus should always be long-term. It may be three to five years before the housing market turns around. But it will come back. A person must have patience.